Depending on the type of business, you could be starting off solo or looking to hire a team that will help you expand. But not every proprietor has enough capital to hire individuals with the expertise they need. If you’re in the same situation, you might find that awarding employee shares can be helpful for your business.
What Is Employee Share?
Also called equity or sweat equity, it works by offering a share of your business to your new hires instead of regular monetary compensation. Employee shares can be awarded from the beginning and could also work as an incentive later.
Upon hiring, applicants are offered equity in place of labor and work benefits. Through this system, if the employee accepts a certain amount of equity, it will help the business startup to lower salary costs in the meantime. Once the company has grown into stability, the company can start paying the employees their desired salaries or as deemed fit by the higher-ups. At the same time, the business is developing and has grown into its competitive edge.
Equity allows employees to own stocks of the company, and workers may agree to the arrangement if they see potential in the business. As a result, they work hard to help your business grow. In perception, the growth of the company also means more significant shares for them.
Employees will take the chance on smaller salaries temporarily for the opportunity to own shares that may eventually rise in value in the long run. The company then retains the best employees in the company, and they develop a sense of ownership of the company. They will work for the benefits of the business as a whole for the continued growth of what they can gain.
How Much Equity to Give
Business owners may need to search for factors that you need to consider when handing a slice of the company to new key hires. Some rely on experience and seniority, and others also base it on salary requirements.
A tech-based capital firm hiring a senior engineer can grant as much as 1%, while a junior development person can expect around 0.5%. If a key hire joins co-founding employers, that third teammate could get a whopping 10% of the company shares.
Discussing the share with your potential employee also helps to work out a compromise. Some individuals will settle for a lower salary in exchange for a higher employee share. It’s also expected that others will try to negotiate for a higher wage instead. Realize that anyone who takes on employee shares instead is also taking a risk at your company.
So, while you have one of the best business ideas this year, you may want to plan today how you can best cater to the growth of both your business and future employees. Knowing what kind of scheme could work for everyone shows that you’re willing to take a chance for your workers and their abilities, and not just the business only.
How To Give Shares to Your Employees
There are a few types of employee share schemes that you, as the business owner, can offer to your potential team. They come with pros and cons, depending on your location. With the difference in equity structure, it’s advisable to seek a lawyer’s counsel to work out what’s best for your company.
You have the option of working with equity management firms like Cake Equity. If you are new to such schemes, they are vital assistants to building a list of investors for raising capital and share issuance through tech-based means. They handle the kind of share-giving that works for your business and employees.
There are three types of employee share options:
Stock Options
One option that allows you to grant your employees the possibility to buy company shares. Stock options are giving them the chance to purchase a percentage of the company at a fixed price.
You’d want to create a stock option plan if you want to give it to your employees. The program includes the stock price and the vesting and expiration dates. It indicates your allowed period when the employees can purchase the issuer’s common stock no matter the specific price set at the said time.
Employers should make it clear to the employees that they are not getting the actual stocks. Exercising stock options is also only allowable after their employment. They typically expire in less than a year, but some employees may extend stock options for up to three years.
Stock Grants
A stock is a share or slice of the company, and multiple people can own a share of your business. The piece can vary in amount, and that indicates how much ownership an individual currently has. A stock grant is how much stock you can allow your potential employee to have as compensation for their expertise.
Stock grants are also precisely what they are called, granted only to them by the employer. They are attractive because employees don’t even have to purchase them. Offering a stock grant to your employees has its benefits:
- An employee who becomes a stockholder can own a larger piece of the company
- Employers can grant a small number of stock shares to their employees
- Employees can choose to receive market-priced stocks outright
Stock grants are uncommon, and they work for a period that can keep individuals working for the company. That’s because if you grant a specific number of stock shares that vest over five years, the employee must spend an employment term of five years before getting the chance to keep them.
Stock Warrants
A stock warrant is similar to stock options. But if we’re to compare warrants versus options, business owners only give the employees a chance to own a business. Employers offer stock warrants as a right to their workers to buy stocks or shares of your company.
That means employees have to forward money in exchange for the right to buy stocks utilizing warrants at a specific market price and date. Because of its nature, stock warrants are also a way to gather capital for the growth of the company.
Employees can be offered two different stock warrant options:
- Put Warrant – it’s the employee’s right to sell back shares to the company at a specific price in the future
- Call Warrant – the right to buy shares at a particular price in the future
When employees purchase stocks from the company, the company issues them a certificate once they decide to exercise the warrant. It indicates the warrant terms, the final day, and the expiry date of the warrant. Stock warrants do not mean immediate stock ownership but could only be used by employees to buy or sell stock depending on the future price. This type of scheme is uncommon in the United States but is practiced in countries like China.
In Conclusion
Business startups can grow and thrive even when you have small capital. Employee share schemes and Employee Share Options are alternative compensation that you can offer talented individuals you would want to help you drive your business to success. While not everyone may accept that kind of deal, you can work with management firms specializing in handling employee equity to help you work on a fair value for them.
